Exam 9: The Basic Tools of Finance

Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

If a person is risk averse, then as wealth increases, total utility of wealth

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Which of the following is the largest?

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

In answering which of the following questions would you find it necessary to calculate a present value?

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Discuss the statistical evidence concerning the efficient markets hypothesis.

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

The market for insurance is one example of reducing risk by using diversification.

The future value of a deposit in a savings account will be smaller